The Importance of Financial Planning for a Business

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No matter how passionate and committed you are to your business, you can't succeed if the money's not there. If sales are slow, you still need enough cash on hand to pay utilities, vendors and employees. Knowing how much money you can afford to spend helps you budget. The importance of financial planning in business is that without it, your business may not survive.

Startup Benefits of Financial Planning

Financial planning shouldn't wait until your business is up and running. If you're launching a new company, much of the importance of financial planning in business happens before you open your doors.

  • How much will opening your business cost you? There are fees for registering a business name, incorporating, licensing, buying insurance and trademarking your logo or name. 

  • Where will your initial capital come from? Savings, family, investors or a loan? How bad a hit will your finances take if your business doesn't work out?

  • Once your business opens, how much cash income will you need to stay open?

  • What are your revenue targets for the first year? The second? Five years down the road? 

One of the benefits of financial planning before you launch is that you get a clear view of what the risks and prospects are. If the financial risks are too high, you'll have to go back and revise your plans before taking the plunge.

How Are You Doing?

After your business opens, another of the benefits of financial planning is that it gives you a basis for comparison. How does your company's performance match up to your original assumptions? It's easy for an entrepreneur to drown in numbers and data, but your financial plan helps put things in context.

  • Is sales revenue lower than you expected?
  • Is overhead eating up more of your budget than you planned for?
  • Is your initial cash reserve dwindling too fast?
  • Have you had to take on extra debt to stay afloat?
  • Are the problems seasonal or is it a steady trend, getting worse each month?

If you're performing better than expected, that's wonderful. If you're falling short, you need to ask why and figure out how to improve. Perhaps you need to cut your management team, or push more aggressively to market and sell your products The importance of financial planning in business is that it helps you figure these things out.

Long-Term Planning

Lots of businesses struggle through the first few years and rise to profitable success later on. When money is tight and sales are sluggish, it can feel as if that rise is never going to happen. Another of the benefits of financial planning is that it helps you keep the end game in mind.

Suppose your financial plan projected your company running at a loss for the first year, then starting to turn a profit. Month after month of operating in the red can cut deep into your optimism. If you look at your financial plan and see you're roughly where you predicted you'd be, that can give some of your confidence back.

Planning and Investment

One of the biggest benefits of financial planning is that without a plan, it's harder to tap financial support. Venture capital investors want to know that they'll see a return on their money. Banks want to know that if they write you a loan, you can pay it back.

When bankers or investors ask questions, your financial plan can provide answers:

  • What are your growth projections?
  • Will you issue shares down the road to raise more capital?
  • What's your debt repayment plan?
  • Do you have enough money to cover your liabilities?
  • What's your projected revenue stream?
  • How do your revenue and expense projections match the reality?

Data from your plan can help determine whether you get the money you need or go hungry.

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About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

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